Standing in the doorway of her red-brick terraced house with her arms folded, Shazia Nisar watched the campaigners criss-cross the street, banging gloved fists on door after door. The doorstepping for the Oldham East and Saddleworth byelection, triggered by the expulsion from parliament of Phil Woolas for slandering his Lib Dem opponent last May, barely paused for Christmas. Last Thursday it was once again in full flow.

Activists spilled through the streets and alleyways of Glodwick, close to the centre of town, clutching boxes filled with leaflets. The snow had melted but lingering bad weather subdued the atmosphere. A grey sky hung heavily over the rows of houses and Nisar's mood seemed to match the bleak backdrop.

"The Lib Dems have let us down," she said, listing the economy, tuition fees and the educational maintenance allowance among her complaints. "I'll be voting Labour," she added, before stepping out of the cold and pushing her door shut.

For the next two weeks, this north-western town and its suburbs will become the centre of British politics. Ed Miliband, Nick Clegg, David Cameron and many of their most senior colleagues will make repeated visits, in an attempt to influence the choice of an electorate that spans social and racial divides.

All three party leaders know this election is not just about the future of Oldham. Just over six months after the coalition government was formed and British politics took a dramatic new direction, voters have the chance to indicate what they think of it so far. Oldham is the first ballot-box test of the new era and the nation will be watching.

"I urge the voters of Oldham and Saddleworth to make the government sit up and listen," Miliband will say tomorrow when he delivers a major speech in the town after completing 100 days as Labour leader. He hopes to capitalise on concerns such as Nisar's – broken promises, cuts and VAT – to deliver Labour a triumph that will reassure doubters over his leadership and alarm coalition sceptics within Tory and Lib Dem ranks.

Even with Labour as the bookies' clear favourite, it is a high-risk strategy for Miliband to stake his reputation on the outcome. If Labour turn the race into a referendum on the government and lose – then what?

A fortnight from polling day the seat feels difficult to call, perhaps because of the social diversity of the constituency. From the deprived estates of Glodwick – with its large Asian population – it is just a 15-minute drive to Saddleworth; the council houses give way to large semis and detached homes that line country roads and peer over the edge of the moors. Orange Lib Dem posters, and the name of their candidate, Elwyn Watkins, seem to dominate here.

If the stakes are high for the Labour leader, they could be even higher for his Lib Dem counterpart. In opposition, Clegg's party would relish a byelection like this: a chance to overturn a wafer-thin majority and boost its numbers in Westminster. But now the Lib Dems occupy a different world – one in which they form the government and can be held responsible for savage cuts that will surely be felt in the homes of Oldham East and Saddleworth. Some polls have placed the Lib Dems as low as 8%. The byelection is the first chance to establish if the situation really is so dire for Britain's third party.

On Thursday, deputy leader Simon Hughes made his second visit to the seat, hitting the streets with up to 100 volunteers. He said people talked about "manufacturing, jobs, training, skills, imports, exports, education". "I did not get the impression that people were seeing this as a referendum on the government," he added. On Friday it was the turn of bruised business secretary Vince Cable, and soon Clegg will make his second visit. They will be accompanied by a team of press officers who have moved north for the duration of the campaign.

Then there are the Conservatives. There has been much chatter in the corridors of Westminster about whether Cameron's party might step back in this race, opening the way for a Lib Dem victory and perhaps even providing a happy precedent for an election pact in the future. That view is not popular at the party's Oldham headquarters.

Baroness Warsi, the Conservative chair, said she had given up her holiday to battle for Oldham East and Saddleworth. It was "nonsense", she said, to suggest that the Tories will put up a weak fight: "Volunteers were coming in even when it was snowing hard. The PM is coming; ministers are coming; yesterday my vice-chair was here, and there were 12 MPs." A meeting on Boxing Day drew 300 people, she said.

For those Tories who suggest the campaign is half-hearted, she has a message: "There is a whole pile of leaflets that need to be delivered and a long list of doors that need knocking on. They should put up or shut up. We are taking this very seriously".

The Tories hope that Warsi will be their secret weapon in Oldham, given its large Asian population. On Thursday, the baroness sat in a room with 30 or 40 women of Pakistani origin wearing traditional dress. Warsi spoke quickly in fluent Urdu, asking them to share their concerns with her. One wanted more access to education through single-sex colleges, another career advice.

As they spoke, plates filled with samosas and bhajis were passed out, followed by steaming cups of tea. Before leaving, Warsi pressed them: "I need you to turn out. If Kashif [Ali, the Conservative candidate] becomes MP, you – Oldham – will have a direct line to Westminster. Tell people at home to vote, tell friends to vote. If you have a postal vote, fill it in and send it."

In May, Labour triumphed here over the Lib Dems by just 103 votes. But Ali was only a further 2,300 behind, and he is not stepping down to make things more comfortable for the coalition. To most observers, this is a genuine three-horse race.

David Whaley, editor of the Oldham Evening Chronicle, agrees that Labour are favourites: many believe they will recover anti-Gordon Brown protest votes lost in May while benefiting from disaffection with the coalition's cuts programme. But Whaley insists the race is hard to call because so many different factors are in play. There is anger at the government (a coalition with a Conservative majority); anger at the local council (a coalition with a Lib Dem majority); and a belief among some that Labour caused the economic mess in the first place. The Woolas factor may also be a negative for Labour, he says.

Woolas was barred from politics for three years after being found guilty in court of lying about Watkins on campaign literature, associating the Lib Dem candidate with extremism. Watkins said he "gambled everything on the case", which he brought without party funding. He accused Woolas of stirring up racial hatred in a town that had left behind the days when tensions spilled over into violent race riots.

Whaley agrees that the town has moved on: "In the national media, the first image of Oldham is always a burning van – but that was nearly 10 years ago." But he says he is not sure how the Woolas factor will play out, because the Labour politician had been a popular constituency MP. He suggests there might even be some backlash at Watkins for going to court in the first place. All three main candidates – Ali, Watkins and Labour's Debbie Abrahams – have been affected by the controversy, he adds. "We have a bunch of horses racing here that are not exactly thoroughbreds chasing to the line. They are limping horses."

Whaley believes the three main parties were so damaged locally that he asked in a recent leader whether a high-profile independent – "an Esther Rantzen or Martin Bell" – might join the race. That hasn't happened, although there are 10 candidates standing.

For Labour, 13 January is – it hopes – an opportunity to wound the coalition. In his speech tomorrow, Miliband will invite the people of Oldham East and Saddleworth to give the government a bloody nose. If he succeeds, it will be a major boost for his leadership. But if he fails, the questions that might have been asked of the coalition may be directed at him instead.